25 - 1

Departmental Accounting

Chapter 25

25 - 2

Preparing income statements

focusing on gross profitby departments.

Learning Objective 1

25 - 3

Cost CentersCost Centers

Profit CentersProfit Centers

Learning Unit 25-1

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Catlin’s Department StoreIncome Statement Showing Departmental Gross Profit

Year Ended December 31, 200x

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Operating Expenses 170,000Income Before Taxes $203,800Income Tax Expense 89,520Net Income $114,280

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Operating Expenses 170,000Income Before Taxes $203,800Income Tax Expense 89,520Net Income $114,280

Learning Unit 25-1

25 - 5

Preparing income statements

focusing on departmentalnet income.

Learning Objective 2

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Learning Unit 25-2

Direct expenses can be identified and traced to specific departments.

Indirect expenses cannot be specifically traced to departments.

These costs must be apportioned on the basis of square footage or other allocation bases.

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Learning Unit 25-2

What are some examples of direct expenses?– sales salaries– delivery expense– advertising expense

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Learning Unit 25-2

What are some examples of indirect expenses?– building– advertising expense (some may be apportioned)– depreciation– administration

25 - 9

Catlin’s Department StoreIncome Statement Showing Departmental Income

Year Ended December 31, 200x

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Operating Expenses 114,500 55,500 170,000Income Before Taxes $181,100 $ 22,700 $203,800Income Tax Expense 89,520Net Income $114,280

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Operating Expenses 114,500 55,500 170,000Income Before Taxes $181,100 $ 22,700 $203,800Income Tax Expense 89,520Net Income $114,280

Learning Unit 25-1

25 - 10

Building Expense $16,000Building Expense $16,000

Children’s30,000 ÷ 40,000 = 75%

$16,000 × 75% =$12,000

Adult10,000 ÷ 40,000 = 25%

$16,000 × 25% =$4,000

Learning Unit 25-2

25 - 11

Delivery Expense $10,000Delivery Expense $10,000

Children’s$10,000 × 60% =

$6,000

Adult$10,000 × 40% =

$4,000

Learning Unit 25-2

25 - 12

Advertising Expense $3,000Advertising Expense $3,000

Children’s$3,000 × 2/3 =

$2,000

Adult$3,000 × 1/3 =

$1,000

Learning Unit 25-2

25 - 13

Depreciation Expense $30,000Depreciation Expense $30,000

Children’s$30,000 × 3/4 =

$22,500

Adult$30,000 × 1/4 =

$7,500

Learning Unit 25-2

25 - 14

Administrative Expense $60,000Administrative Expense $60,000

Children’s$60,000 × 2/3 =

$40,000

Adult$60,000 × 1/3 =

$20,000

Learning Unit 25-2

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Catlin’s Department Store Children’s Adult

Direct Indirect Direct IndirectExpenses:Salaries $25,000 $15,000Building $12,000 $ 4,000Delivery 6,000 4,000Advertising 7,000 2,000 4,000 1,000Depreciation 22,500 7,500Administration 40,000 20,000Total $38,000 $76,500 $23,000 $32,500

Children’s Adult Direct Indirect Direct Indirect

Expenses:Salaries $25,000 $15,000Building $12,000 $ 4,000Delivery 6,000 4,000Advertising 7,000 2,000 4,000 1,000Depreciation 22,500 7,500Administration 40,000 20,000Total $38,000 $76,500 $23,000 $32,500

Learning Unit 25-2

25 - 16

Preparing income statements

focusing on departmentalcontribution margin.

Learning Objective 3

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Learning Unit 25-3

Contribution margin is the amount of revenue available to cover indirect expenses.

Separation of direct costs from indirect costs allows a better view of performance levels of each department.

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Learning Unit 25-3

Cost of goods sold is deducted first with the remaining direct expenses deducted next.

The balance remaining is the contribution margin.

Indirect expenses are deducted last to arrive at the net income figure.

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Learning Unit 25-3

Factors other than just dollar amounts of the contribution margin and net income should be considered before a decision is made to discontinue a department.

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Catlin’s Department Store

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Direct Expenses 38,000 23,000 61,000Contribution Margin $257,600 $ 55,200 $312,800Indirect Expenses 109,000Income Before Taxes $203,800Income Tax Expense 89,520Net Income $114,280

Children’s Adult TotalNet Sales $565,500 $275,800 $841,300Cost of Goods Sold 269,900 197,600 467,500Gross Profit $295,600 $ 78,200 $373,800Direct Expenses 38,000 23,000 61,000Contribution Margin $257,600 $ 55,200 $312,800Indirect Expenses 109,000Income Before Taxes $203,800Income Tax Expense 89,520Net Income $114,280

Learning Unit 25-2

25 - 21

End of Chapter 25